An article in Reuters today outlined the issue relating to a widening gap in the interest rates being paid by buyers in Southern Europe like Spain and the Northern Europeans highlighting in particular Finland.
Whilst a few years ago margins charged by Spanish Banks averaged for Residents between 0.50% to 1% above Euribor and 1% to 1.5% above for Non Residents the latest data shows average rates in Spain are currently 4.32%. This equates to an average margin of 3% above current Euribors.
From one of lowest interest rates in the Eurozone this now places Spain toward the top end.
On the face of it this appears to be a problem for a country who is struggling and who should in fact be benefiting from the Central Banks decrease in Base Rate and subsequent falls in Euribors where as in fact the reverse is true.
The reasons for this however are intertwined with the state of the economy and specifically the Banks. In Finland, who still maintains a triple AAA rating the cost of funds for their banks is much lower than those for Spanish Banks. Access to wholesale funding and therefore amount of cash they have to lend is also much higher for Finnish Banks.
Spanish Banks, who are already struggling to meet new capital ratios, are having to set aside large amounts from current profits to cover losses on property assets, and who are losing retail deposits at a fast rate cannot make money on mortgages by lending at the low rates other Northern European counterparts are currently lending at.
Whether such low rates, as for instance Finland is currently seeing, will just help history repeat itself causing an overheating of the property market there and the normal subsequent slump remains to be seen. It is rather perverse that the very thing that caused the issues in Spain this being unrealistically cheap credit should now have found its way, because of low base rates, to countries who avoided the property boom first time round.
Only 10 years ago UK residents were applauding mortgage rates at 5.5% to 6% this being significantly lower than the average 8% experienced for previous years and many people rushed to Spain to buy because rates were 4.5%.
Times have now changed and rates of 4.5% are seen as high rather than sustainably low.
Whilst the average rate in Spain is 4.32% it is really attitude to mortgage rate that has changed significantly rather than the rates are now historically very high.